I'm hesitating between these two ways of organizing the menu. I prefer option 2 because "Side menu 1" could grow quite a bit and it seems cleaner to me. On the other hand option 1 allows faster navigation as only one click is required to access the edit interface.
As a rule - stick to convention! This means that your first image is the correct one. Users don't have to understand your way of navigation, they know from other implementations how a treeview-left side navigation works! This is true even if you hav a lot of sub categories and items in sub categories.
Never ever break existing convention, unless you have a very good reason to do so. From the information provided, you don't.
